As the electronic-signature company benefited from the adoption of digital contract tools, the company lost more than a third of its value in a day after it suggested that the COVID-induced demand boom might be waning, according to DocuSign Inc., a hot pandemic stock play last year.
The shares of DocuSign DOCU were off 39% in Friday morning trading, and were on track to post their steepest single-day decline on record. The drop came after DocuSign's latest earnings report, in which the company delivered a disappointing billings outlook, as Chief Executive Dan Springer called for a return to normalized buying patterns after a stretch of accelerated growth. The stock has dropped 36% in the year to date, after nearly tripling up 200% in 2020. After climbing 16% last year, the S&P 500 index SPX has gained 21% this year.
Needham analyst Scott Berg said that the company's report was a good reminder that even outstanding companies take their proverbial eye off the sales ball. Berg said that fixing sales issues often requires several quarters, and that is why DocuSign announced that it would change some aspects of its sales organization. Citi Research analyst Tyler Radke wrote that DocuSign delivered one of the largest SaaS software-as-a-service whiffs in recent memory, with total billings growth of 28% less than the 34% guide during the fiscal third quarter. DocuSign's billings outlook for the fourth quarter was 22% at the midpoint, which came in significantly less than the 32% consensus figure that Radke cited in his note to clients.
With a largely resilient performance compared to work-from- home peers over the last two quarters, we are surprised that DOCU is seeing significant customer behavior execution issues cropping up now, and in this magnitude, he continued.
Radke called the report a thesis shifter, even though he kept his buy rating on the stock, he said that DocuSign has a first-mover advantage in its domain and there are few signs that people are moving back to manual agreements. He reduced his target price to $231 from $389.
Evercore ISI analyst Kirk Materne wrote that while DocuSign faced difficult comparisons in its most recent quarter, the company misread the market in terms of demand and led to a faster than expected deceleration in billings growth. The stock's sharp move downward indicates that the damage is essentially done as it relates to the quarter, he wrote. After speaking with DocuSign's management team, Materne believes that DocuSign's fiscal fourth quarter billing outlook assumes no improvement in demand gen eration compared to 3 Q, which could prove conservative. Materne called the stock's selloff a bit overdone, but he admitted that the reality is that this stock went from a story where investors were thinking about durable growth in the 30% s to the 20% s and that is going to cause a pretty material de-rate. He cut his price target to $200 from $320, and wrote that until DOCU can show that it can generate, not just fulfill demand on a regular basis, the multiple is capped. Materne maintained an outperform rating on the stock, citing the long-term potential of e-signature technology, especially in markets like government where DocuSign is very early in its penetration.
DocuSign shares are down 52% from their September closing high of $310.05.